Investments have stalled, for good reasons

For long, since 2012, the greatest worry on the investments front has been the rising stock of projects whose implementation gets stalled for some reason or the other. Both, the UPA government and the Modi government have focused a lot on de-bottlenecking such projects by resolving inter-ministerial wrangles, inter-government coordinations, and sometimes even leaning upon regulators, etc. However, the problem of stalled projects has persisted in spite of the best efforts of all governments.

But, government red-tape is not the only problem. In fact, it is a minor problem today. The biggest problem is that the economic scenario is simply not conducive to invest into new productive capacities. In many cases it makes sense to stall projects till the economic conditions turnaround and except in select infrastructures, it makes no sense to set up new projects.

As a result, we have reached a situation where investments themselves seem to have stalled.

New investment proposals fell to a new low of Rs.790 billion in the quarter ended December 2017. The preceding quarter had already seen a record low of Rs.1,153 billion. Now, we see a new low in investor enthusiasm to create new capacities. This is steep fall in new investment project announcements.

Estimates for recent quarters will be revised upwards as new data becomes available. Yet, these are unlikely to change the basic narrative that new proposals to investment into additional capacities have evaporated for all practical purposes.

New investment proposals during calendar 2017 add up to Rs.7.9 trillion. In the best case scenario these may be revised upwards to about Rs.10 trillion. Yet, this would be much lower than the Rs.14.5 trillion worth of new investment proposals seen during calendar 2016 or Rs.15.3 trillion recorded in 2015. In 2014, these added up to Rs.16.2 trillion.

A steady fall is visible over the last three years. New investments shot up for a couple of quarters soon after the Modi government was formed at the centre. But, that enthusiasm was short-lived and a decline set in soon thereafter.

The boom in investments between 2004 and 2012 was led by the private sector. Sixty per cent of the new investment proposals during this period of exuberance were by the private sector. The government’s share increased after this boom period. However, its role was never sufficiently counter-cyclical. It did not offset the fall in private investments. As a result today, both, public and private sector investments are at their decadal lows.

Most government investment proposals are into roads projects announced by either the Ministry of Road Transport & Highways or the National Highways Authority of India. There are a number of projects by the Airport Authority of India but, most of these do not have a cost estimate available, yet. Transport services that includes roads, railways, airways, shipping and logistics account for about 40 per cent of total new investments now compared to less than 36 per cent a year ago and 26 per cent before that.

The rise in share of transport services reflects a steep fall in new investments in the power sector and an increase in investment in the transport sector in 2016-17 and 2017-18. As the demand for power has declined (seen in the low plant load factor of thermal power plants and the fall in its prices), investments have declined correspondingly. Its share in total new investment proposals declined from over 30 per cent during the investments boom years (2005-06 through 2010-11) to 10 per cent in 2016-17 and 10.8 per cent in the first three quarters of the current year.

But, the demand for better roads, railways, airports and logistics is unsatiated. The problem in these investments is more to do with the lack of sufficiently smooth-functioning of Private Public Partnership. While the share of transport services has risen there is a good case for this to rise even further and offset the fall in other sectors. The consequent improvement in infrastructure services would lead to an improvement in investment in other sectors.

Private sector investments into power and in manufacturing are down in response to low demand. Investments have stalled because business conditions are tepid. According to the RBI’s OBICUS, capacity utilisation in the manufacturing sector was down to 71 per cent by June 2017 compared to 83 per cent in March 2011.

Both, the slowdown in investments and the structural shift in terms of sectors make economic sense. But, reviving investments is critical for sustained growth and employment. And, the solution to this lies perhaps more in spurring demand through greater public spending than in flogging the current investment pipeline.